This chapter presents the third business process, the purchasing process. The purchasing process includes the first three steps, requirements determination, purchase order processing, and goods receipt, in the purchase-to-pay process.
The Purchasing Process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
1) Handle the repetitive work routines of the purchasing department and the receiving department.
2) Support the decision needs of those who manage the purchasing and receiving departments.
3) Assist in the preparation of internal and external reports.
The purchasing process is closely linked to functions and processes within and outside the organization.
Definition of Goods verses Services:
Goods are raw materials, merchandise, supplies, fixed assets, or intangible assets.
Services cover work performed by outside vendors, including contractors, catering firms, external auditors, consultants, etc.
An Internal Perspective: Relationship between the purchasing process and its organizational environment.
The purchasing and receiving departments will interact internally with:
Departments within the organization making requests for the purchase of goods and services
The accounts payable department who must pay for the purchased goods
> Information Flows generated by the process:
1. Purchase requisition sent from inventory control department to purchasing department.
2. Purchase requisitions from various other departmetns sent to purchasing department.
3. Purchase Order sent to vendor.
4. Purchase order notification sent to various other departments or to inventory management process.
5. Purchase order notification sent to receiving department.
6. Purchase order notification sent to accoutns payable process.
7. Goods and services received from vendor.
8. Receiving notification sent to accouts payable and general ledger processes.
9. Receiving notification sent to purchasing department.
Internal Perspective Figure:
Goal Conflicts and Ambiguities in the Organization
Individual managers’ goals may not be in congruence with organizational objectives
-Purchasing may buy large quantities of inventory for quantity discounts and to reduce ordering costs
- This may drive up costs of receiving, inspecting, and carrrying inventory
Ambiguity often exists in defining goals and success in meeting goals.
-A purchasing goals might be to select a vendor who will provide the best quality at the lowest price by the
promised delivery date
-Realistically, one vendor probably will not satisfy all three conditions
Prioritization of goals is necessary in choosing the best solution given the various conflicts and constraints placed on the process
-Trade-offs are made in prioritizing among the goals that conflict
-If the market is sensitive to satisfying customer needs, the company may pay higher prices to ensure that it is
procuring the best quality goods and obtaining them when needed
Connections between an organization, including the flow of information, materials, and services, from suppliers of merchandise and raw materials through to the organization's customers,are its supply chain.
-Move raw materials,
-Produce and deliver,
-Market and sell,
-Install and Service.
Supply Chain Management (SCM) - is the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers. The goal of SCM is to increase product availability while reducing inventory across the supply chain.
Supply-Chain Operations Reference-Model (SCOR): a process reference tool that allows companies to benchmark their supply chain processes and to identify how to make improvements in the processses and relationships that it has with partners, suppliers, and customers.
~ 5 Basic components for SCM:
Plan. Measure customer demand for a product or service & develop a way to deliver that product or service.
Source. Select supply sources & procure the goods & services to meet the planned or actual demand, receive product, and authorize payments to suppliers.
Make. Transform a product to a finished state to meed planned or actual demand.
Deliver. Order fulfillment. Receive customer orders, provide goods or service to customers, and invoice customers.
Return. Perform post-delivery customer support and receive defective or excess products back from customer.
An article on Supply Chain ManagementAn article on Supply Chain ManagementAn article on Supply Chain Management : Click on the link to Access!
This article discusses supply chain management at a basic level giving definitions and identifying key concepts. It discusses several elements involved in supply chain management including location, production, inventory, and transportation. It also describes the key pieces involved in managing the chain. These include product flow, information flow and product flow. Furthur it discusses application that are used to manage supply chain management, including planning applications and execution applications. Supply Chain Management Software:Supply Chain Management Software: helps an organization execute the steps in the supply chain. Software products are available to perform individual functions within each of the five steps in SCM and products are available to perform complete steps or several of the steps. The products can be divided into two categories. The first, supply chain planning software accumulates data about orders from retail customers, sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps. The most valuable, and problematic, of these products is demand planning software used to determine how much product is needed to satisfy customer demand.
The second category of supply chain software, supply chain execution software, automates the SCM steps. ERP software is assigned to this category as it receives customer orders, routes orders to an appropriate warehouse, and executes the invoice for the sale. Various Supply Chain Management Software
In general, management of the supply chain leads to some or all of the following benefits:
Lower costs to the customer
Higher availability of product (for the customer, for production, etc.)
Higher response to customer request for product customization and other specifications.
Reduced inventories along the supply chain.
Impoved relationships between buyers and sellers.
Smooth workloads due to planned goods arrivals and departures, leading to reduced overtime costs.
Reduced items costs as a result of planned purchases through contracts and other arrangements.
Increased customer orders due to improved customer responsiveness.
Reduced product defects through specifying quality during planning and sharing defect information with suppliers during execution.
However, there are some things that can go wrong with SCM:
Data not collected or not shared across functional boundaries- For example:
Up to date real time sales data must routed to the SCM demand forecasting system (an enterprise system facilitates this process)
Supply chain performance is not fed back into the planning system. An enterprise system can help by relaying purchasing, receiving, transportation, and other logistical data.
Data that is not available, such as customer, location, and warranty information, must be collected during the sales processing and made available to the appropriate functions.
Lack of sharing of information between supply chain partners due to lack of trust and confused lines of responsibility
Inaccurate data in the supply chain negatively affects the entire chain- data needed for post-customer support such as customer, location, and service contracts is not available; this data must be collected during processing and made available to the proper functions
Over-reliance on demand forecasting that may be inaccurate- Good demand forecasting requires an intelligent combination of software tools and human experience
Competing objectives can lead to unrealistic forecasts – for example, marketing may push to have a high target for a particular product with an increased budget for promotion, where sales may want the opposite in order to meet its sales quota.
Selected Methods for Information Sharing (Collaboration) in the Supply Chain Continuous Replenishment (CRP) - Features:
Vender obtains, in real-time, a buyer's current sales, demand , and inventroy data and replenished the buyer's inventory
Stock management information such as reorder point is used to make the replenishment decision
Sales and demand data - warehouse withdrawal, production control (for mftg), or retail point-of-sale.
Data may be sent via EDI, aceessed by vendor via a web interface into the buyer's system, or a hosted hub
Replenishment is based on actual rather than plan because it recognizes changes such as changed production schedule, unplanned maintenance downtime, quality problems, or failure to follow plan
Benefits:
Vendor has less uncertainty and can provide specified level of service with minimum cost
Buyer has better balance of inventory cost and customer service
Reduced production downtime
Lower costs are passed on to the partner/customer
Co-Managed Inventory (a form of CRP) -
The vendor replenishes standard merchandise while the buyer manages replenishment of promotion merchandise.
In 1992, Wal-Mart added retailer-provided sales forecast to CRP. The buyer manages exceptions.
Collaborative Forecasting and Replenishment (CFAR) -
Retailer and manufacturer forecast demand and schedule production jointly.
Collaborative Planning Forecasting and Replenishment (CPFR) -Collaborative Planning Forecasting and Replenishment (CPFR) -Collaborative Planning Forecasting and Replenishment (CPFR) -
~ Trading partners share plans, forecasts and other data over the internet.
~ During planning and execution, partners negotiate resolution to exception such as:
* Dramatic change in plans
* Plans do not match
* Forecasts accuracy is out of tolerance
* Overstock and understock conditions
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CPFR Process -
Collaborative Planning
1. Develop front-end agreement (yearly) - establish a scorecard to track key supply chain metrics relative to success criteria.
2. Create joint business plan (quarterly) - identify planned promotions, inventory policy changes, store openings/closings, product changes.
Collaborative Order Forecasting (weekly/daily) - share replenishment plans / Identify and resolve exceptions.
6. Create order forecast.
7. Identify order forecast exceptions.
8. Collaborate on exception items.
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>
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>
Order Generation
9. Generate order - based upon the consensus order forecast at an agreed time horizon.
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>
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Delivery Execution
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Purchase Requisition - an internal request to acquire goods and services. Approved by the requisitioning department supervisor.
Reorder point (ROP) analysis- recognizes each inventory item as unique with respect to the rate at which it is sold, and is assigned a unique reorder point. When the inventory item reaches its reorder point, the item is reordered.
Economic order quantity (EOQ) - technique of analyzing all incremental costs associated wth acquiring an carrying particular items of inventory.
~ Inventory carrying costs:
1. Opportunity cost of investment funds
2. Insurance costs
3. Poperty taxes
4. Storage costs
5. Cost of obsolescence and deterioration
ABC Analysis - technique for ranking items in a group based on the output of the items.
Purchase Order - which is a request for the purchase of goods or services from a vendor. This typically contains data regarding the needed quantities, expected unit price, required delivery date, terms, and other conditions.
Blind copy - certain data on a purchase order may be blanked out. Ex: Quantities ordered may be blanked out as to avoid influencing the count of receiving personnel.
Vendor packing slip - accompanies the purchased inventory from vendor and identifies the shipment, triggers the receiving process.
Receiving report - the form used to record merchandise receipts.- This is the PO recveiving notifiaction now annotated with the quantity recieved.
Acceptance report - acknowledgeing the satisfactory completion of a service contract. Supports the payment due to the vendor in the same way as the receiving report.
Inventory master data - contains a record of each inventory item that is stocked in the warehose or is regularly ordered from a vendor.
Vendor master data - accessed by puchasing personnel when selecting an appropriate vendor. In addition to storing identification data, the vendor data is used by management to evaluate vendor performance and to make various ordering decisions.
Purchase requisistions master data - compilation of the purchase requisitions, requests for goods and services from authorized personal within an organization and for inventory replenishment from automated inventory replenishment systems, such as supply chain management processes.
Purchase order master data - compilation of open purchase orders that includes the status of each item on order.
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Fraud and the Purchasing Function:
The typical cases included in this category of process exploitation are instances in which:
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>
An employee (e.g. a buyer, purchasing manager, or other person) places purchase orders with a particular vendor(s) in exchange for a kickback, secret commission, or other form of inducement from the vendor(s).
An employee has a conflict of interest between his responsibilities to his employer and his financial interest - direct or indirect - in a company with whom the employer does business.
In purchasing activities, conflicts of interest often arise in situations where an employee with the authority to make (or approve) purchases for an organization has some kind of financial stake in a company that sells to the organization. Cases of bribery, kickbacks, and the like present an interesting dilemna. It is accepted business practice for a salesperson to treat a buyer to lunch, to send the buyer promotional "gifts", or to extend other small favors in order to make sales. So, when do such actions stop being "acceptable" and cross the line into improper, either in substance or appearance? Audits of large companies are now being evaluated on independence issues such as the purchasing function. Forensic accounting is also very useful in determining if a purchasing fraud took place.
The purchasing process is a part of the purchase-to-pay process which culminates with the payment of cash. Cash is the most liquid asset a firm has. As a result, the purchasing process should be highly scrutinized because of its strong potential for exposing an organization to fraud and embezzlement.
This article discusses the purchasing and fraud connection, http://www.yourpeoplemanager.com/YcE5aJhoivVsHw.html
Micah's Horizontal (This is extremely abreviated. do not rely soley on this for study)
1.inv sends Purchase requisition to purchase
2. everyone else send them in
3. PO sent to vendor
4. tell everyone PO was sent
5. PO sent to receiving
6. PO sent to A/P
7. Good received
8. tell A/P and GL goods here
9. tell puchase goods here
The Purchasing Process:
This chapter presents the third business process, the purchasing process. The purchasing process includes the first three steps, requirements determination, purchase order processing, and goods receipt, in the purchase-to-pay process.The Purchasing Process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
1) Handle the repetitive work routines of the purchasing department and the receiving department.
2) Support the decision needs of those who manage the purchasing and receiving departments.
3) Assist in the preparation of internal and external reports.
The purchasing process is closely linked to functions and processes within and outside the organization.
Definition of Goods verses Services:
Goods are raw materials, merchandise, supplies, fixed assets, or intangible assets.
Services cover work performed by outside vendors, including contractors, catering firms, external auditors, consultants, etc.
An Internal Perspective: Relationship between the purchasing process and its organizational environment.
The purchasing and receiving departments will interact internally with:
- Departments within the organization making requests for the purchase of goods and services
- The accounts payable department who must pay for the purchased goods
>Information Flows generated by the process:
1. Purchase requisition sent from inventory control department to purchasing department.
2. Purchase requisitions from various other departmetns sent to purchasing department.
3. Purchase Order sent to vendor.
4. Purchase order notification sent to various other departments or to inventory management process.
5. Purchase order notification sent to receiving department.
6. Purchase order notification sent to accoutns payable process.
7. Goods and services received from vendor.
8. Receiving notification sent to accouts payable and general ledger processes.
9. Receiving notification sent to purchasing department.
Internal Perspective Figure:
Goal Conflicts and Ambiguities in the Organization
Individual managers’ goals may not be in congruence with organizational objectives
-Purchasing may buy large quantities of inventory for quantity discounts and to reduce ordering costs
- This may drive up costs of receiving, inspecting, and carrrying inventory
Ambiguity often exists in defining goals and success in meeting goals.
-A purchasing goals might be to select a vendor who will provide the best quality at the lowest price by the
promised delivery date
-Realistically, one vendor probably will not satisfy all three conditions
Prioritization of goals is necessary in choosing the best solution given the various conflicts and constraints placed on the process
-Trade-offs are made in prioritizing among the goals that conflict
-If the market is sensitive to satisfying customer needs, the company may pay higher prices to ensure that it is
procuring the best quality goods and obtaining them when needed
An External Perspective:
-Move raw materials,
-Produce and deliver,
-Market and sell,
-Install and Service.
Supply Chain Management (SCM) - is the combination of processes and procedures used to ensure the delivery of goods and services to customers at the lowest cost while providing the highest value to the customers. The goal of SCM is to increase product availability while reducing inventory across the supply chain.
Supply-Chain Operations Reference-Model (SCOR): a process reference tool that allows companies to benchmark their supply chain processes and to identify how to make improvements in the processses and relationships that it has with partners, suppliers, and customers.
~ 5 Basic components for SCM:
- Plan. Measure customer demand for a product or service & develop a way to deliver that product or service.
- Source. Select supply sources & procure the goods & services to meet the planned or actual demand, receive product, and authorize payments to suppliers.
- Make. Transform a product to a finished state to meed planned or actual demand.
- Deliver. Order fulfillment. Receive customer orders, provide goods or service to customers, and invoice customers.
- Return. Perform post-delivery customer support and receive defective or excess products back from customer.
An article on Supply Chain ManagementAn article on Supply Chain ManagementAn article on Supply Chain Management : Click on the link to Access!This article discusses supply chain management at a basic level giving definitions and identifying key concepts. It discusses several elements involved in supply chain management including location, production, inventory, and transportation. It also describes the key pieces involved in managing the chain. These include product flow, information flow and product flow. Furthur it discusses application that are used to manage supply chain management, including planning applications and execution applications.
Supply Chain Management Software:Supply Chain Management Software: helps an organization execute the steps in the supply chain. Software products are available to perform individual functions within each of the five steps in SCM and products are available to perform complete steps or several of the steps. The products can be divided into two categories. The first, supply chain planning software accumulates data about orders from retail customers, sales from retail outlets, and data about manufacturing and delivery capability to assist in planning for each of the SCM steps. The most valuable, and problematic, of these products is demand planning software used to determine how much product is needed to satisfy customer demand.
The second category of supply chain software, supply chain execution software, automates the SCM steps. ERP software is assigned to this category as it receives customer orders, routes orders to an appropriate warehouse, and executes the invoice for the sale.
Various Supply Chain Management Software
In general, management of the supply chain leads to some or all of the following benefits:
However, there are some things that can go wrong with SCM:
- Data not collected or not shared across functional boundaries- For example:
- Up to date real time sales data must routed to the SCM demand forecasting system (an enterprise system facilitates this process)
- Supply chain performance is not fed back into the planning system. An enterprise system can help by relaying purchasing, receiving, transportation, and other logistical data.
- Data that is not available, such as customer, location, and warranty information, must be collected during the sales processing and made available to the appropriate functions.
- Lack of sharing of information between supply chain partners due to lack of trust and confused lines of responsibility
- Inaccurate data in the supply chain negatively affects the entire chain- data needed for post-customer support such as customer, location, and service contracts is not available; this data must be collected during processing and made available to the proper functions
- Over-reliance on demand forecasting that may be inaccurate- Good demand forecasting requires an intelligent combination of software tools and human experience
- Competing objectives can lead to unrealistic forecasts – for example, marketing may push to have a high target for a particular product with an increased budget for promotion, where sales may want the opposite in order to meet its sales quota.
Link to a website discussing potential problems with supply chain management. The website states that most of these problems come from a lack of control over one or more of the following areas: data, technology, and vendors. The website also offers solutions to these problems.Selected Methods for Information Sharing (Collaboration) in the Supply Chain
Continuous Replenishment (CRP) -
Features:
- Vender obtains, in real-time, a buyer's current sales, demand , and inventroy data and replenished the buyer's inventory
- Stock management information such as reorder point is used to make the replenishment decision
- Sales and demand data - warehouse withdrawal, production control (for mftg), or retail point-of-sale.
- Data may be sent via EDI, aceessed by vendor via a web interface into the buyer's system, or a hosted hub
- Replenishment is based on actual rather than plan because it recognizes changes such as changed production schedule, unplanned maintenance downtime, quality problems, or failure to follow plan
Benefits:Co-Managed Inventory (a form of CRP) -
Collaborative Forecasting and Replenishment (CFAR) -
- Retailer and manufacturer forecast demand and schedule production jointly.
- Collaborative Planning Forecasting and Replenishment (CPFR) -Collaborative Planning Forecasting and Replenishment (CPFR) -Collaborative Planning Forecasting and Replenishment (CPFR) -
~ Trading partners share plans, forecasts and other data over the internet.- ~ During planning and execution, partners negotiate resolution to exception such as:
- * Dramatic change in plans
- * Plans do not match
- * Forecasts accuracy is out of tolerance
- * Overstock and understock conditions
>>
>
>
- CPFR Process -
- Collaborative Planning
1. Develop front-end agreement (yearly) - establish a scorecard to track key supply chain metrics relative to success criteria.- Collaborative Sales Forecasting (weekly/daily) - share demand forecast / Identify & resolve exceptions.
3. Create sales forecast- 4. Identify sales forecast exceptions.
- 5. Collaborate on exception items.
>>
>
>
- Collaborative Order Forecasting (weekly/daily) - share replenishment plans / Identify and resolve exceptions.
- 6. Create order forecast.
- 7. Identify order forecast exceptions.
- 8. Collaborate on exception items.
>>
>
>
- Order Generation
- 9. Generate order - based upon the consensus order forecast at an agreed time horizon.
>>
>
>
- Delivery Execution
>>
>
>
- Purchase Requisition - an internal request to acquire goods and services. Approved by the requisitioning department supervisor.
- Reorder point (ROP) analysis- recognizes each inventory item as unique with respect to the rate at which it is sold, and is assigned a unique reorder point. When the inventory item reaches its reorder point, the item is reordered.
- Economic order quantity (EOQ) - technique of analyzing all incremental costs associated wth acquiring an carrying particular items of inventory.
- ~ Inventory carrying costs:
- 1. Opportunity cost of investment funds
- 2. Insurance costs
- 3. Poperty taxes
- 4. Storage costs
- 5. Cost of obsolescence and deterioration
- ABC Analysis - technique for ranking items in a group based on the output of the items.
- Purchase Order - which is a request for the purchase of goods or services from a vendor. This typically contains data regarding the needed quantities, expected unit price, required delivery date, terms, and other conditions.
- Blind copy - certain data on a purchase order may be blanked out. Ex: Quantities ordered may be blanked out as to avoid influencing the count of receiving personnel.
- Vendor packing slip - accompanies the purchased inventory from vendor and identifies the shipment, triggers the receiving process.
- Receiving report - the form used to record merchandise receipts.- This is the PO recveiving notifiaction now annotated with the quantity recieved.
- Acceptance report - acknowledgeing the satisfactory completion of a service contract. Supports the payment due to the vendor in the same way as the receiving report.
- Inventory master data - contains a record of each inventory item that is stocked in the warehose or is regularly ordered from a vendor.
- Vendor master data - accessed by puchasing personnel when selecting an appropriate vendor. In addition to storing identification data, the vendor data is used by management to evaluate vendor performance and to make various ordering decisions.
- Purchase requisistions master data - compilation of the purchase requisitions, requests for goods and services from authorized personal within an organization and for inventory replenishment from automated inventory replenishment systems, such as supply chain management processes.
- Purchase order master data - compilation of open purchase orders that includes the status of each item on order.
>>
- >
- Fraud and the Purchasing Function:
- The typical cases included in this category of process exploitation are instances in which:
>>
- An employee (e.g. a buyer, purchasing manager, or other person) places purchase orders with a particular vendor(s) in exchange for a kickback, secret commission, or other form of inducement from the vendor(s).
- An employee has a conflict of interest between his responsibilities to his employer and his financial interest - direct or indirect - in a company with whom the employer does business.
In purchasing activities, conflicts of interest often arise in situations where an employee with the authority to make (or approve) purchases for an organization has some kind of financial stake in a company that sells to the organization. Cases of bribery, kickbacks, and the like present an interesting dilemna. It is accepted business practice for a salesperson to treat a buyer to lunch, to send the buyer promotional "gifts", or to extend other small favors in order to make sales. So, when do such actions stop being "acceptable" and cross the line into improper, either in substance or appearance? Audits of large companies are now being evaluated on independence issues such as the purchasing function. Forensic accounting is also very useful in determining if a purchasing fraud took place.The purchasing process is a part of the purchase-to-pay process which culminates with the payment of cash. Cash is the most liquid asset a firm has. As a result, the purchasing process should be highly scrutinized because of its strong potential for exposing an organization to fraud and embezzlement.
This article discusses the purchasing and fraud connection, http://www.yourpeoplemanager.com/YcE5aJhoivVsHw.html
Micah's Horizontal (This is extremely abreviated. do not rely soley on this for study)
1.inv sends Purchase requisition to purchase
2. everyone else send them in
3. PO sent to vendor
4. tell everyone PO was sent
5. PO sent to receiving
6. PO sent to A/P
7. Good received
8. tell A/P and GL goods here
9. tell puchase goods here